How do you determine whether a physician's income from an Ambulatory Surgery Center (ASC) should be treated as passive income or active income on an individual income tax return? The best answer is to consult a tax professional who can advise you based on the specific facts and circumstances related to each individual physician and his or her relationship with the ASC, his or her hospital employer or independent medical practice. There is no one-size-fits-all answer to the question of how to treat ASC income, but below are some of the key issues to think about when considering whether ASC income should be passive or active.

A physician who is employed by a hospital and invests separately in an ASC is generally not able to treat ASC income as active income. This is because the physician is not likely to meet the material participation tests required to qualify as an active business activity.

A physician who owns his or her own practice (and owns greater than 5 percent of the entity) and separately invests in an ASC may qualify to treat his or her ASC income as active income. This is because the physician could be able to group the two business activities, which could allow the physician to meet the material participation test and qualify for active treatment of ASC income.

A physician who owns his or her own practice (and owns greater than 5 percent of the entity) and the ASC is owned within the physician’s practice may also qualify to treat their ASC income as active income. Similar to the example above, the physician could group the business activities, which gives the physician a better chance of meeting the material participation test and qualifying for active treatment of ASC income.

It is important to remember that the proper tax treatment of ASC income is always dependent upon the facts and circumstances of each physician’s situation. It is wise to seek the guidance of a tax professional in determining the appropriate treatment of ASC income.

About the AuthorJimmy Wade is a member of Katz, Sapper & Miller’s Healthcare Resources Group. Jimmy provides tax preparation and planning, financial statement compilations, healthcare consulting, and fair market value analyses. Connect with him on LinkedIn.